What’s the right benchmark for credit risk funds?

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SEBI has created a mutual fund category called ‘credit risk funds’ in its classification scheme. These are funds that can invest only in AA rated corporate bonds or below. The correct benchmark for funds in this category is arguably one that tracks AA rated corporate bonds or below. However, several funds have instead chosen to adopt the Crisil Short Term Bond or the Crisil Composite Bond Fund Index which have no such credit based tilt.

Credit risk funds typically invest in low rated paper and get higher yields than other debt funds. In return, they take on more credit risk. Comparing them with a benchmark without a credit tilt is likely to produce ‘artificial’ outperformance. Fund houses may argue that this can go both ways since the benchmark will outperform when credit risks rise and the prices of risky bonds fall. However, this does not solve the basic problem of misalignment – a benchmark that doesn’t quite track the category.

Below we give you an indicative list of credit risk funds which are using or will use the Crisil Short Term Bond Fund Index and the Crisil Composite Bond Fund Index. Not all funds have done so. Aditya Birla Sun Life Credit Risk Fund has adopted the Crisil AA Short Term Bond Fund Index and so have Kotak Credit Risk Fund and Invesco India Credit Risk Fund.

Fund

Index

Franklin India Credit Risk Fund

Crisil Short Term Bond Fund Index

ICICI Prudential Credit Risk Fund

Crisil Composite Bond Fund Index

IDBI Credit Risk Fund

Crisil Short Term Bond Fund Index

L&T Credit Risk Fund

Crisil Composite Bond Fund Index

Source: Pulse Labs, List is indicative, not exhaustive

Here’s a final thought to leave you with. Crisil itself has outlined the benchmarks it thinks appropriate for different categories of funds post the SEBI classification. It has specified the Crisil Short Term Bond Index, for (you guessed it) Short Duration Funds and the Composite Bond Fund Index for Dynamic Bond Funds. For Credit Risk Funds, Crisil has put out the Crisil Credit Risk Index which none of the funds in our sample have adopted.